Not a smart way to run a pension system

9th March 2016 by John Lappin

It’s really been a case of doing the hokey cokey on pensions tax relief. Last week, reliefs were going, this week, they are not. Pension investors’ heads must be spinning.

Variously since last year’s consultation paper, we have seen the government discuss equalising the reliefs for example at or around 30% which would have increased incentives to lower middle income earners, but cut them to the better off paying higher tax rates with the majority losing 10 per cent. For additional rate tax payers, the picture is already very complicated and restrictive.

Such an equalised system was even dubbed a savers’ bonus by the pension industry’s biggest trade body the Association of British Insurers as it supported this type of reform arguing it was fairer. Yet the devil might have been not just in the detail but in the term i.e. matching might only be up to a certain level of contribution and therefore less generous than the tax relief.

Then we learned that the government was actually favouring either a radical paring back of reliefs to 20% across the board or doing away with them altogether. It would, at a stroke, have furnished a huge amount of cash to help close up that government spending deficit.

The more extreme option would have meant no relief on the way into a pension, but no tax when you finally took the pension and this was dubbed a pension ISA, something government sources suggested everyone could understand.

The pension industry went rather apoplectic about this final idea. Remember the smart money was this happening only a fortnight ago. One expert said there would be Northern Rock-style run on pension providers if it happened. The ABI, as we noted a fan of some degree of reform, said that the government would be creating a long term annual bill i.e. an annual deficit of £5bn a year. No the threat has been lifted for now.

So what should you do as a wise pension investor? Well, if you have a good financial adviser or invest in a decent self select investment platform no doubt you would have been warned about the risk to reliefs and been urged to consider using them.

You will also know that a risk remains to lifetime and annual allowances and maybe some clampdown on tax free cash. You may also begin to worry that the pension industry is crying wolf and yet, to my mind, this would be very unfair. The direction is clear. Reliefs, tax free cash, lifetime limits and more are all in play in these difficult financial times.

A really radical reform may have been postponed, partly because other reforms are only just bedding in such as the big workplace pension system rolling out to millions of small employers and their employees this year and next.

Ultimately, for all the briefings, we can’t predict what happens when the Treasury needs revenue, when new simpler pension systems have an superficial appeal nor indeed do we really know how powerful the pension lobby is.

It is, in case you haven’t noticed, also an intensely political time. The Chancellor of the Exchequer George Osborne may have put off a decision for very non pension reasons, such as the need to assuage backbench concerns and shore up support for the government (and for himself) in the midst of a European referendum.

These are big, broad issues. But for smart investors, who can’t spend their valuable time reading between the lines, or working out which ‘briefing’ to trust, we suggest you make use of whatever reliefs you can afford – certainly if that fits with your long term goals and your short term finances. After all, in most cases you can now get that money back at age 55. You need to be smart about your finances. But is this a smart way to run a pension system? Answer: No.

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John Lappin

Mindful Money

John Lappin, the editor of Mindful Money, has been a financial journalist for more than 15 years. He was a long standing editor of financial newspaper and website Money Marketing and was Headline Money journalist of the year 2009. He believes it is essential that trust is rebuilt between consumers and the financial services industry though most of the onus is on the industry to demonstrate this trust. Without this, consumers and investors will remain undersaved, underinvested and underinsured with huge implications for themselves, their families and for the country too.